Economic Scene; Small Business, Large Mirage

By Peter Passell

Published: May 9, 1990

THESE are disillusioning times. Evangelists steal, athletes cheat and even old Bossy the cow has been caught wreaking death and destruction. But at least one culture hero remains untarnished: the small business, America's engine of employment and prosperity.

Well, not quite untarnished. ''Employers Large and Small,'' a study to be published next month by Harvard University Press, turns a gimlet eye on the legend and finds it hollow. According to the authors, James Hamilton and James Medoff of Harvard and Charles Brown of Michigan, small businesses make no special contribution to employment, productivity or social mobility.

What small business does seem especially good at, the authors argue, is winning political friends and influencing Congressional votes. And as a result, they say, small businesses are getting a free ride that is hard to justify.

Back in 1981 an economist named David Birch estimated that small businesses created eight out of ten new jobs. And since then everyone from Republican Presidents (Ronald Reagan) to Democratic Senators (Dale Bumpers of Arkansas) to business lobbyists (Richard Lesher of the United States Chamber of Commerce) have been repeating the statistic like a mantra.

In fact, the authors contend, Mr. Birch erred by counting new jobs in small plants and stores that were actually owned by large businesses - here defined as companies with 500 employees. The actual figure, they believe, is closer to the six out of ten calculated by the Small Business Administration than Mr. Birch's eight out of ten. And even this ''right'' number, they contend, represents the answer to the wrong question.

Small businesses may create the majority of new jobs, the authors concede. But small businesses are also responsible for most of the jobs that are lost because 60 to 80 percent fail within five years of starting up. From 1976 to 1986 the share of jobs in businesses with fewer than 100 employees actually fell to 35 percent from 36 percent.

According to the authors, moreover, the typical job in a small business is nothing to write home about. Wages average about 10 percent less than big business pays, even after adjusting for the lower skill levels demanded by small employers and the greater likelihood that the job is in a low-wage market.

That is not all the bad news. Small businesses offer less on-the-job training, as well as a greater prospect of being laid off in lean times. And benefits are typically inferior: Small businesses are only half as likely to underwrite a pension plan.

There may well be some intangible benefits in being part of a small business - direct contact with the boss, for example, or the prospect of rapid promotion. But apparently there are some special frustrations as well.

Between 1973 and 1977, 30 percent of the employees of small businesses quit, compared with 21 percent of the employees of big ones. And while small businesses are less likely to be unionized, that may have more to do with lackluster recruiting than with employee attitudes: A Harris poll showed that a higher percentage of small-business workers would vote ''yes'' in a certification election.

Myths can sometimes be socially redeeming even if they are not entirely true. One might argue that the excessive respect of Americans for the virtues of small enterprise - and its flip side, their dislike of big business - safeguards competitive markets and economic liberties.

The fallacy here, the authors suggest, is that small businesses have become as adept as big ones in using the political system to achieve narrow economic ends. Unlike giant corporations, the ''little guys'' - car dealers, bankers, funeral directors, insurance brokers - are influential citizens in every Congressional district. And their trade associations have learned to mobilize the troops when hostile legislation or regulation threatens.

Money is no problem: A 1983 survey showed that households with assets of $500,000 or more owned 80 percent of all small businesses. And political action committees representing small businesses contributed one-quarter of all PAC money received by incumbents during the 1984 senatorial campaigns - the same percentage as organized labor. Congress has not been shy in expressing its appreciation, delivering everything from subsidized loans to tax breaks to a kinder, gentler touch on health, safety and consumer regulations.

Any serious effort to limit the influence of small businesses (or big ones) turns on effective curbs on campaign financing. But that is no reason, say the authors, to leave attitudes toward small business entirely in the hands of the image-makers.